The Advantages of a Retirement Annuity
July 15, 2020
Retirement annuities are one of many strategies that provide financial stability in retirement. Smart retirement planning often includes annuities to supplement other retirement savings and plans. Reviewing the advantages of retirement annuities should be part of any retirement planning conversation.
Steady Income in Retirement
Annuities provide the comfort of a steady income stream in retirement. While it takes a substantial sum to generate enough return to serve as the sole source of income, annuities can supplement other types of savings, providing a steady and reliable flow of income when other investments fluctuate.
Immediate annuities start paying out right away from a lump-sum purchase price or a rollover of another account, such as a 401(k) from a previous employer. Although purchasing an immediate annuity ties up a substantial sum, it may provide peace of mind that there will be some steady income starting right away.
Deferred payment annuities are those you contribute to over time, allowing your savings to build up over time, through compounding interest or even capital appreciation of the underlying investment.
The best-known advantage of a retirement annuity is tax deferral. With employer plans that include an annuity, you contribute money from your paycheck before taxes. These pre-tax contributions may reduce your taxable income during the “accumulation” phase, while your money grows until you retire. In an annuity, your savings and their proceeds are tax-free until payouts begin. By then, you may be in a lower tax bracket which could end up saving you money.
Products That Match Your Investment Style
Cautious investors, or those who aren’t confident in the choice of their own investments, appreciate the security of fixed-rate annuities. The insurance company that sells the annuity to you enters into a contract with you where they promise a guaranteed minimum income over a pre-determined number of years, usually for the rest of your life. Some provide extended coverage for surviving spouses. While the yields tend to be lower on fixed annuities, some retirees prefer the assurance of a promised minimum payout.
Variable annuities allow more flexibility. You decide how to invest your money from the options the insurance company makes available. These usually include a selection of mutual funds. Your investment value may fluctuate with market conditions, and these annuities may carry higher management or other fees. Confident investors who prefer to choose their own investment mix might prefer a variable annuity.
Security Against Outliving Your Money
Specialized annuities that permit long-term deferral of income, beyond the age when withdrawals are mandatory for other types, provide a way for those with substantial means, who don’t need income immediately upon retirement, to set aside money for later in life. Called “qualified longevity annuity contracts” or “QLACs,” these contracts are subject to IRS rules about how much you can set aside within them. They are designed to provide security against outliving your money if you anticipate a long retirement. They typically allow deferring payouts until as late as 85.
When annuities come into the discussion of financial plans for retirement, consult a certified annuity advisor for help in understanding which options might be best for you.
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